In recent years, overlapping criminal and civil cases has become common as civil and commercial disputes and cases of economic crime have tended to rise year by year. Most of these cases involve company employees entering into contracts in the company’s name by making the company’s official seal without approval.
Such cases have aroused extensive concern. Disputes, however, arise regarding whether the act of the offending employee does not constitute apparent agency, and whether the company involved should be bound by the contract concerned, and assume corresponding civil liability after the offending employee is investigated for criminal liability.
Impact of criminal procedures on civil procedures. According to the Civil Procedure Law and other applicable laws and regulations, overlapping criminal/civil cases are treated in the principle of either criminal procedures preceding civil procedures, or parallel application of criminal and civil procedures. Different principles will apply depending on the court’s decision on whether the facts suspected of criminal offence have direct impact on the nature, effect, and the responsibility of and for the civil case.
If the facts suspected of criminal offence do have an impact on the civil case, the court should rule suspension of hearing and resume the hearing after the end of criminal procedures. If the facts suspected of criminal offence do not have direct impact on the civil case, the hearing of the civil case, independent from the criminal procedures, may proceed.
Criminal liability of the offending employee and civil liability of the company involved. The civil law and criminal law have their own rules and systems. Concurrent application of the norms of civil law and criminal law will result in coexistence of civil liability and criminal liability. The criminal liability functions by punishing and preventing crimes, while the civil liability remedies damages by regulating the property relation and personal relations among equal subjects. These two types of liabilities differ in content, function and applicability. Even if the subjects of the criminal liability and civil liability are one and the same, these two types of liabilities may coexist without conflicting each other.
For this reason, the civil law is the only law applicable to determine whether the offending employee’s act of entering into a contract without approval constitutes apparent agency, whether the contract concerned is effective, and whether the company involved is required to assume civil liability.
The criminal procedures may at most be applied to produce related evidence for civil procedures with the help of the powerful criminal investigation means of the state. They, however, will not be applied for a civil trial in the place of civil procedures. This thinking is reflected in some cases decided by the Supreme People’s Court (SPC).
Judgment rules of apparent agency. In accordance with the provisions on apparent agency in the General Provisions of the Civil Law, the Contract Law, and the SPC Guiding Opinions on Several Issues Concerning Hearing of Disputes over Civil and Commercial Contracts under the Current Situation, apparent agency in essence is a type of unauthorized agency.
Its constitutive conditions include subjective and objective ones. The objective conditions refer to the conditions under which the agent is not granted the power of attorney, but the counterparty has reason to believe that it is. The counterparty should bear the burden of proof for “reasonable belief”. The subjective conditions refer to that the counterparty should be in good faith without any fault.
In practice, various factors including the reason, conditions and context for occurrence of the legal act in question, occupational characteristics of the actor, industrial characteristics and conventions of the principal, the degree of illusion, and the ability of the counterparty to recognize an illusion, will be taken into consideration to decide on the existence of apparent agency, and the good faith of the counterparty without fault. It can be learnt from a review of SPC’s judicial precedents that apparent agency can be judged mainly by the following two rules.
First, positive conditions. The actor is the actual controller, a manager or an employee of the principal. The contract is executed in the office of the principal. The counterparty is not obliged to verify the authenticity of the seal. The actor performs the contract in the name of the principal for a long time. The principal apparently is aware of the act of the actor, but does not raise any objections. The principal uses several seals of the company for external matters and the contract is affixed with unregistered seals. The principal issues an invoice at execution of contract.
Second, negative conditions. The counterparty readily places trust in the identity of the unauthorized agent and fails to perform its necessary duty of verification. The counterparty does not request affixation of the company seal, or seek confirmation from the company. The scope of authorization is inconsistent with the matters acted by the agent. The counterparty is fully aware that the actor is not granted the power of attorney. The act of the counterparty is inconsistent with the trading practice. The counterparty subjectively seeks high interest, which is contradictory to the conditions of good faith.
For special matters like provision of security, the counterparty assumes a stricter duty of examination. The principal fails to manage the important documents required for the actor to exercise his/her rights. The counterparty transfers the fund into a personal account. The counterparty fails to prove its claim that the act of the agent constitutes apparent agency.
Preventive measures. Though the criminal liability of the offending employee and the civil liability of the company are mutually independent, the criminal act of an employee will result in reputational risk of the company in most cases and such risks will not be mitigated in a short time. A company may take preventive measures in the following aspects against possible adverse impacts of such cases:
- Appointing a person for seal management and applying a strict seal management system. Do not use several company seals for external matters. Do not attempt to avoid its legal responsibility by means of selective ratification;
- Intensifying management of employees and visitors’ moving in and out of the company. Management should not be lax, even for former employees (and even the executives);
- Encouraging mutual supervision of employees and perfecting corresponding reward mechanisms;
- In case an employee commits a crime, the company should focus its attention on gathering evidence in the criminal investigation, which may be useful as core evidence for the parties concerned in a civil case.
Yao Xiaomin is a partner and Xu Xiaoxuan is an associate at Lantai Partners
29th Floor, Tower B, Disanzhiye Mansion
A1 Shuguang Xili, Chaoyang District
Beijing 100028, China
Tel: +86 10 5228 7777
Fax: +86 10 5822 0039